Chip Maker Posts Graphic Gains

10/09/2007 12:00 am EST

Focus:

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says chipmaker NVIDIA is in the right place to profit from the explosion of multimedia graphics technology. 

NVIDIA’s (NASDAQ: NVDA) graphics processor technologies are found in desktop and notebook computers, personal digital assistants, cellular telephones, video game consoles, and consumer electronic devices.

The company is best known for making dedicated graphics processing units (GPUs), [which produced 60% of first-half revenues in the fiscal year ending January 2008]. A GPU is a microchip used solely for video processing. NVDA’s GeForce 8800, used in desktop and notebook PCs, is the first GPU that supports Microsoft’s application programming interface for Windows Vista.

NVDA also provides GPUs for the professional graphics solutions market, which accounted for 15% of fiscal first-half sales. The Quadro line of workstation products can handle complex visual computing tasks such as industrial product design and nonlinear video editing. Quadro Plex is a highly scalable visual computing system capable of processing 80 billion pixels per second.

The nForce branded media and communication processors (MCPs) and integrated graphics processors (IGPs) produced 17% of fiscal first-half sales. MCPs are single-chip or chipset products that can perform functions such as high-demand multimedia processing from broadband connections independent of the CPU. IGPs are integrated onto the motherboard as part of a core logic chipset on AMD-based systems.

The consumer products market, which produced 7.3% of sales, supplies GPUs for portable media devices such as wireless phones, [as well as game consoles like] the Sony PlayStation 3 and the Xbox. NVDA also derives a small amount of revenue from component sales.

GPU sales were traditionally driven by the professional and hardcore video game markets. But demand for GPUs [has increased because of] the growing use of PCs to edit video files such as home movies, the popularity of video games utilizing 3D graphics engines, the steady penetration of high-definition technologies, and the launch of new operating systems such as Vista that require more graphic rendering capabilities than ever.

Thanks to greater demand for GPUs, net revenues were up 30% year-over-year to $1.37 billion for the first half of fiscal 2008. A strong pricing environment and higher volumes boosted the gross profit margin by 277 basis points to 45.19%. Pro forma net income for the period, which excludes stock-based compensation, climbed 62% to $362.5 million or 93 cents per share.

Capacity constraints may be the biggest impediment to near-term growth. Competition from Intel and Advanced Micro Devices is also a concern. Yet NVDA [got approximately a third of the graphics market] in the second calendar quarter of 2007, up from just 19.7% a year earlier. No doubt some of the gain is due to Apple’s decision to switch to NVDA’s GeForce 8600 series GPU in its newly updated MacBook Pro notebook computers. (The stock closed Monday below $38—Editor.)

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